£9,000 in savings? Here’s what I’d do to retire with a £1,637 monthly passive income

Forget the nine-to-five grind! Building a treasure chest of diversified stocks could be the ticket to a lifetime of passive income.

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There are many ways that UK investors can make life-changing passive income these days. But I think one of the best options is to build a portfolio of reliable high-growth FTSE shares. Investing in shares doesn’t require lots of initial capital to start and few other asset classes deliver the same returns.

If I invested £9,000 in UK shares today, I could work towards building a monthly passive income of £1,637 when I retire. Here’s how I’d go about doing this.

How should I invest?

The first step would be to open an ISA account if I didn’t already have one. A Stocks and Shares ISA is a self-directed account allowing investments up to £20,000 a year tax-free. This helps to maximise my returns by reducing my tax obligations.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

What kind of returns can I expect?

The FTSE All-World Index has achieved a compound annual growth rate of 9.93% over the past 20 years. An exchange-traded fund (ETF) like the Vanguard Funds FTSE All-World (LSE:VWRL) is a way to invest in the entire index. It’s achieved annualised returns of 9.6% over the past 10 years.

However, past performance is no indication of future performance. In the event of an economic crisis, index trackers tend to fall in line with the market and investors can’t adjust the portfolio themselves. For this reason, I prefer to build a portfolio of my own.

Annualised returns of 9.6% is a lofty goal, but I believe 7% is realistic for a well-balanced portfolio. By including a mix of high-yield dividend shares, I could aim for an average of 4% extra per year in dividends.

In 30 years, an investment of £9,000 into this type of portfolio could grow to over £200,000, paying dividends of around £7,650 per year. At this point, I could retire and begin withdrawing £1,000 a month from the investment, which would reduce it by only 6% per year. When adding this to the dividends, my total returns would be £1,637 per month.

Of course, this is purely an example and in real life, the actual returns could be higher, but also much lower.

Which shares to pick?

One example of a share I would pick is AstraZeneca (LSE:AZN). 

The pharma giant has achieved 104% growth over the past five years and pays a decent dividend of 3.17%. However, its price-to-earnings (P/E) ratio has also increased and is now quite high, at 37.9. This means the stock could be somewhat overbought and might experience a price correction in the short term.

However, this wouldn’t be a huge concern for me as pharmaceuticals is a defensive industry. Over the space of 30 years, the industry is unlikely to experience large losses as its products typically attract high demand. But AstraZeneca does face stiff competition from the likes of Pfizer and Johnson & Johnson – so it must stay on top of its game to avoid being out-marketed. But of all the UK pharma stocks I’ve researched, I think it’s got the best chance of achieving this.

I’d aim for a portfolio of around 20 stocks in total, including several growth stocks like AstraZeneca mixed with a few high-yield stocks like Aviva and HSBC.

That could be a winning strategy if you ask me!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in AstraZeneca Plc, Aviva Plc, and HSBC Holdings. The Motley Fool UK has recommended AstraZeneca Plc and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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